About Morningstar OBSR
Morningstar OBSR is a research and consultancy company that specialises in providing qualitative investment research and product analysis. OBSR has grown steadily since it was established in 1999 and was acquired by Morningstar in April 2010. They boast one of the largest and most experienced fund research teams in the UK.
Morningstar OBSR’s research approach
Morningstar OBSR uses an investment research approach that has been in place since 1994 and is founded upon forward-looking, rather than backward-looking research. This leads to a strong emphasis on qualitative aspects of research. The key factors underpinning this research include:
- Strength of investment process and length of time it has been in place
- Continuity of investment personnel
- Investment style that has proven durable over time
- Clearly defined investment objectives
- Strong and consistent past performance record
Favourable risk adjusted returns
As part of this research process Morningstar OBSR believe it is critical to obtain a full understanding of the fund and its objectives and so their research is supported by a continuous timetable of fund manager meetings. They also conduct meetings with other members of investment teams and keep in close contact with business managers in order to understand a company’s strategic direction.
The Morningstar OBSR Analyst Ratings
The Morningstar OBSR Ratings Service was set up in 2002 and is now well established as the UK's most highly regarded provider of fund ratings. The ratings signal the level of conviction Morningstar OBSR has in a fund and its ability to meet its objectives now and in future, based on a proven research process where qualitative research is supported by quantitative analysis.
Once they have concluded the due diligence process for a particular fund it may be considered for a Morningstar OBSR Analyst Rating. The fund will then be presented to the Morningstar OBSR Fund Ratings Committee for consideration. Ratings are assigned globally on a 5 tier scale running from Gold to Negative. The top 3 ratings Gold, Silver and Bronze, all indicate that Morningstar OBSR analysts think highly of the fund; the differences between them correspond to differences in the level of analyst conviction in a fund's ability to outperform its benchmark and peers over time, within the context of the risks taken. Neutral Ratings are assigned to funds in which the analysts don't have a strong positive or negative conviction, while funds designated with a Negative rating possess at least one flaw that analysts believe is likely to significantly hamper future performance, such as high fees or an unstable management team.
Morningstar do not work to a ‘quota’ and are not paid to rate funds. The Ratings are designed to be an independent mark of quality but also a clear indication of a manager's ability to meet or exceed a fund's objectives compared to other funds of a similar type. Morningstar OBSR are not paid to rate funds. Morningstar OBSR has a review programme for every fund to assess whether the investment process is still in line with their understanding and is appropriate for its objectives. If material changes occur the Morningstar OBSR Rating may be adjusted, or place Under Review.
Establishing the Select Range of Funds
There are four guiding principles that provide the broad framework for selection:
1. Independence – Morningstar OBSR’s aim is and always has been to provide objective and high quality analysis with ratings awarded on merit. They are not paid to award ratings enabling complete independence and impartiality in their recommendations and to be focused upon investment quality.
2. Investment quality is the most important criteria for the Select Range of funds. This key objective is aligned with Morningstar OBSR’s own research process, which seeks to identify the most compelling investment funds in the each sector/category. The vast majority of the funds on the list enjoy Morningstar OBSR Analyst Ratings.
3. Diversity and coverage are also key requirement for the Select Rage in compiling the fund list we have ensured representation from all major IMA sectors and considered the need to feature funds that have a range of risk profiles and styles.
4. Service and support is also a consideration. Ongoing support and service from fund management companies is extremely important to Fair Investment Company in order to make sure we can offer a first-class service to our investors.
Based on these criteria, the Select Range is a high quality, investment-led and wide ranging fund list that offers fund selections for the majority of investment needs.
Monitoring the Select Range
Morningstar OBSR is responsible for monitoring the funds on in the Select Range. They meet with fund managers on a quarterly basis (six months in the case of multi-managers), ensuring that their opinions are constantly refreshed. Internally, their views are discussed on a weekly basis at regular Morningstar OBSR team meetings and more formally at Ratings Meetings, which occur monthly around a quarterly reporting cycle for each sector.
Criteria for Selection and De-Selection
The aim of the Select Range is to identify funds that satisfy the above criteria and will endure the test o time. Inevitably, with a focus on investment quality, the list will need to change. Potential triggers for a change are:
- A change in the fund’s management and/or the broader team
- A change in the fund’s mandate, philosophy, process, risk controls
- Corporate change
- A change in the fund’s competitive positioning
- Morningstar also maintains a list of reserve funds that would be the first port of call in the event that an immediate alternative is required.